The Economic Policy Institute Blog

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Ezra Klein’s recent piece arguing that inequality is not the defining challenge of our time has attracted plenty of attention by now, so this might be getting old for people, but a couple of more thoughts.

First, I actually think he has a fair point in worrying that inequality could displace failure to fully recover from the Great Recession as a focal point for policymakers (I’ve actually worried a bit about that myself in the past—see here). And while there are plenty of ways that these issues are entangled, there are plenty of ways they’re not, and caring about acting aggressively on inequality is not actually a precondition to agreeing that we should push the U.S. economy back to full-employment (see pieces by economists like Ken Rogoff and Martin Feldstein, who have not shown any real interest in the inequality problem but who argue for boosting demand to complete the recovery).

On the other hand, it’s not like engineering a full recovery from the Great Recession has actually been a pressing focal point for policymakers (outside of the Fed) for a long time now. They really gave up focusing on this around 2011, and rising concerns about inequality are not why they gave up (for the record, the reason they did is simple: Republicans, especially in the House, have been determined to throttle government spending, and the resulting austerity is why the economy is nowhere near full recovery). Another reason to not worry too much about the alleged distraction of inequality is that acting to stem its rise often dovetails pretty nicely with boosting demand and helping recovery. For example, a substantial increase in the minimum wage would actually provide a moderate demand boost. Not a game-changing one, but it moves in the right direction, for sure. And if arguments to return more quickly to full employment are buttressed by invoking issues of inequality rather than “stimulus versus austerity” (a debate that has not borne fruit in the policy realm), that’d be great.

Second, a point Larry Mishel made earlier really needs emphasizing: reducing inequality will boost living standards for the vast majority even if it has no effect on average growth. I tried to provide some arithmetic on this, and how much a bigger problem rising inequality was than declining average growth rates in dragging on the vast majority’s living standards growth post-1979, in something I wrote recently for Demos.

But put simply, even if the enormous rise in inequality in the three decades before the Great Recession had no impact at all on growth rates, then it still translated into living standards of low- and moderate-income households growing much, much more slowly than they would have absent this rise in inequality.

So the punchline to all of this is that even ambiguity about the effect of inequality on average growth should actually be seen as a win for those seeking to aggressively combat rising inequality with policy, not for those complacent about it.

This raises a real problem with the strategy of defining the problem of rising inequality as its malign effect on slowing overall growth in an effort to make it a top policy concern; it sets the bar too high. In order to argue with a straight face that one shouldn’t seek to aggressively use policy levers to check the rise of inequality, you really have to argue that research concretely shows that pulling these levers drags so heavily on subsequent growth that even low- and middle-income families will find themselves worse off. And while the evidence that rising inequality mechanically slows growth is not nailed to the wall (yet?), evidence that rising inequality leads to a growth bonanza is way, way thinner. This was a key point, by the way, that Larry and I tried to make in our Journal of Economic Perspectives piece on the top 1 percent.

This separability of average growth rates and what happens to the living standards of the vast majority is something that has been surprisingly hard to make salient in policy debates. Trust me, at EPI, we’ve been trying to do it for a long time. The biggest barrier to this salience by far is that too many economists and policymakers simply assume that efforts to check inequality will slow growth. But again, the evidence on this is really slim. From a friendly outsider’s perspective, I’d urge those arguing for more action to check inequality (like the new Washington Center for Equitable Growth) to remember that they don’t need a clean win on the inequality-hurts-average-growth question, instead, they just need a draw.

Another roadblock in the way of an inequality-fighting agenda is that far too many economists and policymakers are unwilling to push policies to improve living standards growth for the vast majority if they do nothing clearly beneficial for average growth, let alone if they come into mild conflict with maximizing average growth (I’ll note that current CEA Chair Jason Furman was a clear exception to this in his remarks at the opening of the WCEG, for which good on him).

The willingness to privilege income growth for the vast majority ahead of improving average income growth is one of the key things separating EPI from most other research institutions in DC. We actually don’t get enough credit for being much more upfront about these priorities in our work, and instead often get flak for simply having a point of view. Our research and data analysis is scrupulous, transparent, and up to all research industry standards, but we do indeed start with an end goal: figuring out which policies will be most successful in boosting low- and moderate-income families’ living standards, and being willing to advocate for them even if they can’t be reliably shown to boost average growth. As Larry said in his previous post on this, we really are not that concerned about making sure the incomes of the top 1 percent are never harmed by policy. They’re doing fine and will keep doing fine.